Yulim International Company Ltd. vs. International Exchange Bank

Persons who bind themselves jointly and severally with the principal debtor as sureties guaranteeing full and complete payment are solidarily liable for the debt, and an assignment expressly executed as interim security does not extinguish the obligation. The liability as surety is direct, immediate, and enforceable without prior exhaustion of remedies against the principal or other securities, and the burden of proving extinguishment by payment rests on the debtor asserting it.

Yulim International Company Ltd. is a domestic partnership whose capitalist partners are James Yu, Jonathan Yu, and Almerick Tieng Lim. International Exchange Bank, now Union Bank of the Philippines, is a commercial bank engaged in extending credit facilities secured by chattel mortgage and personal suretyship. The governing framework for the dispute is found in the Civil Code provisions on joint and solidary obligations, guaranty and suretyship, and modes of extinguishing obligations by payment, cession, and dation in payment.

On June 2, 2000, International Exchange Bank granted Yulim International Company Ltd., a domestic partnership, a credit facility in the form of an Omnibus Loan Line for ₱5,000,000.00 evidenced by a Credit Agreement. The facility was secured by a Chattel Mortgage over Yulim's inventories in its merchandise warehouse at 106 4th Street, 9th Avenue, Caloocan City, and, as further guarantee, James Yu, Jonathan Yu and Almerick Tieng Lim executed a Continuing Surety Agreement in favor of iBank.

Yulim availed of the facility through five promissory notes: PN No. 2110005852 for ₱1,298,926.00 dated October 26, 2000 maturing January 29, 2001; PN No. 2110006026 for ₱1,152,963.00 dated November 18, 2000 maturing February 5, 2001; PN No. 2110006344 for ₱499,890.00 dated December 4, 2000 maturing March 12, 2001; PN No. 2110006557 for ₱798,010.00 dated December 18, 2000 maturing April 23, 2001; and PN No. 2110100189 for ₱496,521.00 dated January 11, 2001 maturing May 7, 2001. These notes were later consolidated under a single promissory note, PN No. SADDK001014188, for ₱4,246,310.00 to mature on February 28, 2002. Yulim defaulted, and on April 5, 2002 iBank sent demand letters to Yulim through its President James and through Almerick, without success. Thereafter iBank filed a Complaint for Sum of Money with Replevin, obtained a writ on August 8, 2002, and the seized warehouse items realized only ₱140,000.00 at sheriff's sale on November 7, 2002.

According to petitioners, the loan had already been fully paid after they assigned to iBank Condominium Unit No. 141 with parking space at 20 Landsbergh Place, Tomas Morato Avenue, Quezon City, whose pre-selling value was ₱3.3 Million but whose market value had allegedly risen to ₱5.5 Million. They relied on iBank's letter dated May 4, 2001 requiring execution of a Deed of Assignment over the unit, asserting their understanding that upon iBank's approval the assignment would be considered full and final payment, with all supporting documents delivered. For its part, iBank maintained through its Senior Bank Officer that the unit was offered only as security or collateral on the premise that payment would still be made in cash, and that no dacion en pago was ever executed. The Deed of Assignment itself stated in Section 2.01 that it was executed as interim security for repayment of loans granted and to be granted, and in Section 2.02 that Yulim would immediately execute a Deed of Real Estate Mortgage once title issued in its name, whereupon the Deed of Assignment would become null and void. Petitioners moved to dismiss on October 2, 2002 on the payment ground, which the trial court did not entertain for non-compliance with Rule 15, and in their Answer dated May 16, 2006 reiterated payment by assignment and assailed iBank's penalties and charges as exorbitant, oppressive and unconscionable.

The trial court found Yulim alone liable for ₱4,246,310.00 with interest at 16.50% per annum from February 28, 2002, dismissing the case against the three individuals for insufficiency of evidence on the ground that no iota of evidence showed the loan proceeds benefited their families, and dismissing counterclaims. On appeal, the factual findings material to review were that no evidence established full settlement, that the Deed of Assignment contained nothing signifying acceptance as full payment, and that the three individuals had signed as sureties whose liability did not depend on family benefit.

• Payment by Assignment: Petitioner argued that Yulim's consolidated loan of ₱4,246,310.00 had been extinguished when petitioners executed a Deed of Assignment over Condominium Unit No. 141 with parking slot at 20 Landsbergh Place and delivered all pertinent supporting documents to iBank.
• Approval as Full Payment: Petitioner maintained that iBank's letter dated May 4, 2001 expressly required the Deed of Assignment with the understanding that upon iBank's approval it shall be considered as full and final payment of the obligation.
• Payment by Cession: Petitioner invoked Article 1255 of the Civil Code, contending that cession or assignment of property to creditors in payment of debts released the debtor, with agreements on its effect governed by the parties' stipulation.
• Excessive Charges and Damages: Petitioner argued that iBank's penalties and charges were exorbitant, oppressive and unconscionable, and that iBank should be ordered to pay attorney's fees, moral damages and exemplary damages.

• Solidary Liability as Sureties: Respondent countered that individual petitioners James, Jonathan and Almerick executed a Continuing Suretyship Agreement and should be held solidarily liable with Yulim, including for penalty charges under the Credit Agreement and promissory notes.
• Assignment as Mere Collateral: Respondent maintained that the Deed of Assignment was offered and accepted only as security or collateral on the premise of cash payment, not as full payment, as shown by the absence of any dacion en pago document and by testimony that the property was worded as security.
• Attorney's Fees and Costs: Respondent argued that petitioners should be held liable for attorney's fees and that the individual petitioners should be jointly and severally liable with Yulim for costs of suit incurred to protect its rights.

• Solidary Liability of Sureties: Whether petitioners James Yu, Jonathan Yu and Almerick Tieng Lim are jointly and severally liable with Yulim for its loan obligations on the basis of the Continuing Surety Agreement executed by them.
• Extinguishment by Assignment: Whether Yulim's consolidated loan obligation of ₱4,246,310.00 was extinguished by the execution of the Deed of Assignment over the condominium unit in favor of iBank.
• Damages and Attorney's Fees: Whether petitioners are entitled to moral damages, exemplary damages and attorney's fees against iBank.

• Solidary Liability of Sureties: Yes. The Continuing Surety Agreement expressly bound the individuals jointly and severally as sureties guaranteeing full payment, making their liability solidary, direct and immediate under Articles 2047 and 1207.
• Extinguishment by Assignment: No. The Deed of Assignment was expressly an interim security pending execution of a real estate mortgage, not a dation in payment or cession extinguishing the debt, and payment was not proven.
• Damages and Attorney's Fees: No. The loan remained unpaid and no bad faith or basis for recovery of moral, exemplary damages or attorney's fees by petitioners was established.

• Solidary Liability of Sureties: The undertaking was a suretyship because the individuals unconditionally and irrevocably guaranteed full and complete payment of all credit accommodations, interest, fees and penalties, with liability direct, immediate and not contingent on pursuit of remedies against the principal or other securities. Because the obligors undertook to be jointly and severally liable, solidarity attached under Article 1207, their liabilities being interwoven and inseparable with the debtor's. Benefit to the sureties' families was irrelevant, since Articles 161 of the Civil Code and 121 of the Family Code apply only when liability is enforced against the conjugal partnership itself, whereas enforcement here was against them as sureties.
• Extinguishment by Assignment: The May 4, 2001 letter accepted only collaterals and consolidation of the various notes into one note for ₱4,246,310.00 maturing February 28, 2002, specifying term, interest periodicity and rate, and listed three supports: Deed of Assignment, Chattel Mortgage and Continuing Surety Agreement. Section 2.01 acknowledged the assignment as mere interim security for loans granted and to be granted, while Section 2.02 required execution of a real estate mortgage once title issued, rendering the assignment null and void thereafter. An assignment to guarantee an obligation is in effect a mortgage, not an absolute conveyance conferring ownership, and Article 1255 on cession requires two or more creditors and assignment of the entire property, unlike dation in payment under Article 1245 requiring alienation of property in satisfaction of a monetary debt governed by sales law, which was never contemplated or documented.
• Damages and Attorney's Fees: No right to damages or fees accrued to debtors who failed to discharge the burden of proving payment with legal certainty after the existence of the debt was established. The affirmed monetary award and denial of counterclaims followed, the rest of the RTC decision being sustained.

• Suretyship — By guaranty a person binds himself to fulfill the principal debtor's obligation upon default; if he binds himself solidarily with the principal debtor, the contract is called suretyship and the provisions on joint and solidary obligations apply. Applied here to characterize the Continuing Surety Agreement as suretyship because the individuals unconditionally guaranteed full payment of all accommodations, interest, fees and penalties.
• Solidary liability from "jointly and severally" undertaking — There is solidary liability only when the obligation expressly so states or when law or nature requires solidarity; an undertaking to be jointly and severally liable means the obligation is solidary. Applied to hold James, Jonathan and Almerick solidarily liable with Yulim, their liability being direct, immediate and not contingent on prior pursuit of the principal or other securities.
• Nature of surety's liability — A surety is considered in law the same party as the debtor as to whatever is adjudged on the obligation, their liabilities being interwoven and inseparable, with the surety directly and primarily responsible without reference to the principal's solvency. Applied to reject the requirement of showing family benefit before enforcing the suretyship.
• Assignment to guarantee as mortgage — An assignment to guarantee an obligation is in effect a mortgage and not an absolute conveyance of title conferring ownership; it is but a security and not satisfaction of indebtedness. Applied to construe the condominium Deed of Assignment, expressly denominated interim security pending a real estate mortgage, as not extinguishing the loan.
• Payment by cession vs. dation in payment — Article 1255 cession contemplates two or more creditors and assignment of the entire debtor's property, releasing the debtor only for net proceeds absent contrary stipulation, while dation in payment under Article 1245 alienates specific property to the creditor in satisfaction of a money debt and is governed by sales law. Applied to reject reliance on Article 1255 where only one creditor was involved and no sale for the loan amount was contemplated or documented.

• "In a contract of suretyship, one lends his credit by joining in the principal debtor’s obligation so as to render himself directly and primarily responsible with him without reference to the solvency of the principal." — States the canonical definition distinguishing suretyship and grounding direct, primary liability without prior exhaustion.
• "A surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable." — Defines the inseparability of surety and principal liability supporting solidary enforcement.
• "This ASSIGNMENT is executed as an interim security for the repayment of any loan granted and those that may be granted in the future by the BANK to the ASSIGNOR and/or the BORROWER, for compliance with the terms and conditions of the relevant credit and/or loan documents thereof x x x." — Provides the textual basis for construing the condominium assignment as temporary security rather than payment.
• "The ASSIGNOR hereby warrants and undertakes that as soon as title to the Assigned Property is issued in its name, it shall immediately execute the necessary Deed of Real Estate Mortgage in favor of the BANK to secure the loan obligations of the ASSIGNOR and/or the BORROWER." — Establishes the parties' intent to constitute a future mortgage, rendering the assignment functus officio upon title delivery.

• Manila Banking Corporation vs. Teodoro, Jr., G.R. No. 53955, January 13, 1989, 169 SCRA 95 — Followed as authority that an assignment to guarantee an obligation is a mortgage, not an absolute conveyance conferring ownership.
• Palmares vs. Court of Appeals, 351 Phil. 664 (1998) — Cited to define suretyship as lending credit by joining the principal obligation and becoming directly and primarily responsible.
• Philippine National Bank vs. Hon. Pineda, 274 Phil. 274, 282 (1991) — Cited for the rule that a surety is the same party as the debtor with interwoven, inseparable liabilities.
• Crystal vs. Bank of the Philippine Islands, G.R. No. 172428, November 28, 2008, 572 SCRA 697, 703 — Cited with Escano vs. Ortigas, Jr., 553 Phil. 24 (2007) for the rule that a jointly and severally undertaking creates solidary liability.
• Philippine Bank of Commerce vs. De Vera, 116 Phil. 1326, 1329 (1962) — Followed for the proposition that an assignment in essence a mortgage is security, not satisfaction of indebtedness.
• Development Bank of the Philippines vs. Court of Appeals, 348 Phil. 15, 29-30 (1998) — Cited to distinguish Article 1255 cession, requiring multiple creditors and assignment of entire property, from dation in payment.

• Article 2047, Civil Code — Defines guaranty and provides that binding oneself solidarily with the principal debtor creates suretyship governed by solidary obligations rules; applied to classify the Continuing Surety Agreement as suretyship.
• Article 1207 and Articles 1207 to 1222, Civil Code — Provide that solidarity exists only when expressly stated or required by law or nature of obligation; applied to impose solidary liability from the express jointly and severally guarantee.
• Article 1255, Civil Code — Allows cession or assignment of property to creditors in payment, releasing debtor only for net proceeds absent contrary stipulation; invoked by petitioners but held inapplicable for lack of multiple creditors and entire-property assignment.
• Article 1245, Civil Code — Provides dation in payment alienating property in satisfaction of money debt is governed by sales law; applied to require a contemplated sale for the loan amount, which the Deed of Assignment did not show.
• Article 161, Civil Code and Article 121, Family Code — Cited by the RTC to require family benefit before individual liability; held inapplicable because enforcement was against petitioners as sureties, not against the conjugal partnership.

Associate Justice Presbitero J. Velasco, Jr., Chairperson, Associate Justice Diosdado M. Peralta, Associate Justice Mariano C. Del Castillo as Acting Member vice Associate Justice Francis H. Jardeleza, and Associate Justice Martin S. Villarama, Jr. concurred, with no separate concurring opinion adding significant reasoning.